Greetings:

Federal regulators jolted the auto industry with two surprising pieces of news this month. First, Uncle Sam says that the fines automakers incur for falling short of government fuel economy rules are doubling, a painful blow for the industry. And second, the government doesn't believe the car industry will hit the lofty fuel economy goal that regulators targeted for the year 2025. It all sounds a bit contradictory. But on closer inspection, the feds' actions start to make sense.

CAFE Break?

The federal government sets fuel economy standards according to its Corporate Average Fuel Economy (CAFE) program. Basically (and we're simplifying a lot here), each automaker sells a mix of different types of vehicles: Some, fuel-sippers and others, gas-guzzlers. The average mileage of all those cars and trucks is supposed to meet a minimum level set by the Environmental Protection Agency and the Department of Transportation. The target is scheduled to rise each year as fuel economy standards get tighter.

In 2025, the government wants the CAFE fuel economy figure for all passenger vehicles sold in the U.S. to reach 54.5 miles per gallon, a big jump from 2016's 35.5 mpg. Granted, the mileage numbers the government uses here are different from what car buyers see on the window stickers of new cars, for various technical reasons. The 2025 target of 54.5 mpg in CAFE math works out to about 38 mpg in the real world, according to Green Car Reports. Still, the improvement the feds want to see a decade from now is hefty.

But what happens when Americans stop buying the fuel-efficient cars that regulators had been counting on to reach that 2025 target? Back when gasoline cost more than $3 per gallon, compacts and hybrids were selling briskly. But now, with the average price of regular unleaded close to $2, drivers have rediscovered their love of pickup trucks and SUVs, which currently make up roughly 60% of new car sales. And while manufacturers have gone to impressive lengths to boost the fuel economy of those big vehicles -- employing everything from aluminum-body pickup trucks to small turbocharged engines -- they simply cannot make the mileage of trucks and SUVs match that of smaller cars.

No one knows what new vehicles will look like a decade from now. But the government is dialing back its expectations for the fuel efficiency of those future vehicles. The feds now are pegging the average mileage of new cars and trucks sold in 2025 at about 51 mpg, a modest decline from its previous 54.5 mpg target.

Mileage Crackdown

Even as the government admits carmakers won't hit its long-run mileage target, it is ramping up fines for companies that fall short in the near term. Early this month, the National Highway Traffic Safety Administration announced it is ratcheting up the penalties it assesses on automakers for missing their CAFE mileage targets. Environmental groups hailed the move, arguing that the current fines aren't painful enough to encourage manufacturers to shape up. Especially when low-mileage trucks and SUVs are so popular and so profitable to build, it's possible that some companies see the noncompliance fine as just a cost of doing business.

So what gives? Why is the government lowering its expectations about future fuel economy but cracking down on car companies that don't meet their mileage targets? "It is sort of a mixed message," says Bill Visnic, editorial director at SAE International's mobility media group and a longtime auto industry analyst. But he sees a certain logic. The CAFE program's midterm review period -- the point at which the government will examine the progress the industry has made in hitting mileage goals and reassess whether carmakers will be able to achieve their upcoming targets -- is coming up. If regulators decide to formally adjust the 2025 mileage goals, that would be the time to do it. Visnic sees the EPA's recent downplaying of future mileage gains as a chance to "concede to reality a little bit," since car buyers have gone crazy for fuel-thirsty trucks and SUVs lately. (Continues below.)

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But bowing to reality doesn't mean the feds plan to go easy on carmakers about saving fuel. The message is to "speed it up a little bit" in implementing further efficiency-minded enhancements on future vehicles, Visnic says. Meanwhile, those extra fines will hurt, especially when it comes to companies with lineups that are heavy on trucks and SUVs (although the added cost will ultimately get passed on to the customer in the form of higher prices).

48: The New 12?

Even if regulators do decide to formally lower their long-run fuel economy goal when they issue their midterm review in 2018, carmakers know they have to keep finding ways to squeeze more miles from every gallon. To do so, they'll no doubt continue to adapt a whole range of technologies, from hybrids to lightweight construction to battery-powered electric cars.

Soon, the auto industry will embrace a relatively new fuel-saving technology: 48-volt electrical systems, to augment the traditional 12-volt batteries and wiring that have been starting up car engines and powering stereos for decades. The addition of small lithium-ion batteries and beefed-up electrical components will give automakers a slew of new ways to take the load off the car's internal combustion engine.

For instance, a 48-volt system will allow the engine to be shut off more often, in more situations, such as when coasting to a stop while approaching a red light. Many cars already come with these start-stop systems, but 48-volt electrical architecture will handle the rigors of frequent starts and stops much more effectively. Also, 48-volt systems can power so-called electric superchargers, which will be more energy-efficient than conventional superchargers that rely on the car's engine to force extra oxygen into the combustion cylinders. Power-hungry vehicle components, such as anticollision systems, will rely on 48-volt batteries and thus put less of a drain on the gas engine.

Perhaps more promisingly, 48-volt systems will turn many future vehicles into "mild hybrids" by using the small lithium battery to power a small electric motor incorporated into the car's drive train. Such motors will help the internal combustion engine get the car up to speed and then recapture energy when the car brakes by turning into generators. Mild hybrids won't give quite the mileage-enhancing boost as the type of full hybrid system found in cars such as the Toyota Prius, but they'll yield solid mileage gains at much lower cost and without the need for extensive engineering changes. In fact, mild hybrids promise to make future cars feel a bit peppier, a nice side benefit to saving gas.

Makers of 48-volt systems figure to win plenty of business in coming years from automakers looking for cost-effective ways to keep up with Uncle Sam's CAFE mandates. Prominent suppliers include Delphi, Robert Bosch and Continental.

Sincerely,

Jim Patterson

jpatterson@kiplinger.com

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